Today there are many ways to get seed funding for a business. The old traditional way was to go and ask the bank manager for a business loan. As there are problems in the economy and banks are being a lot more frugal with commercial loans, people need to look elsewhere to get the right loan to suit their business requirements.
Nowadays, there are other alternative ways to get seed funding other than relying on mainstream business banking. Companies can now source funding publicly through crowdfunding or privately through investment banks. Structured funding can be done through equity stakes or through debt finance.
This is where individuals engage in a world where people are prepared to invest small amounts of money into a thought out idea. These crowdfunding platforms allow the creators to showcase their creativity to enable funding growth through the platform. Usually these businesses are novel ideas and aim to solve important problems.
Crowdfunding pros and cons:
- You are exposed to a large audience to begin with (in the form of investors). These investors use a web platform to discover new business start ups that they would like to invest in. It is a possibility that your business could attract thousands of investors before launching.
- Investors in your venture are also fans of your business and will help evangelize your startup adding ‘word of mouth’ marketing as an added benefit.
- Through the web based platform, you can expose your business documents. It is a means to communicate to investors where the business is heading.
- This is good for start up and early stage investing. By pooling small amounts of capital together, it gives your business the start up capital it needs.
- The investors don’t directly involve themselves with the day to day running of the business which gives you the freedom to operate it.
- You have the option of seeking help and advice from the community of experts and mentors.
- You can decide how much equity you want to give up in your business. How you would like to structure it and then list your proposal for the crowd to see and decide
- Not suitable if you need large project funding (beyond $1million) or for projects looking towards expanding in the growth stage through capital injection
- Crowdfunding might only carry you to the next stage where you need to seek another round of funding.
- You need to sell your idea and convince more than one investor in order to reach your target funding amount. If you don’t raise enough capital, time works against your start up schedule so campaigning and marketing your idea is an important factor to consider.
You can get Joint Venture seed capital either for a small or large project. The pros and cons are :
- Joint venture brings together sets of different skills to achieve a common goal
- The business can enter new markets
- Some Governments recognise business partnerships
- Risks are diversified
- All members are decision makers which might stall progress on business activities
- Conflicts of cultural interests
- Management styles and structure must be noted
- Must have good exit strategy
As you can see from the graph below, asking angel investors / business angels is quite risky. These types of lenders usually have a seed cap of $1 Million USD therefore if you are looking to raise large project finance, this is not the source to use.
Angels are very wealthy individuals/groups who have made money grafting their own seed business to successful business growth. They are willing to invest in business start ups for two reasons: they understand your situation, and they’re a credible source of contacts and advice.
Angel Investors are a great source for businesses looking for seed capital because they are a useful contact and give sound advice which can be more important than the money. With angel investors, we’re now talking about proper venture funding, so it’s time to introduce the concept of “the exit strategy”. Many business founders are often surprised that investors expect them to sell the company or go public (IPO). The reason why angel investors do that is that investors want their capital back.
Angel Investor Pros and Cons:
- There will not be costs which you would find associated with other forms of funding
- Liquidity injected into the project
- Investor may bring in added experience and advise
- May have to give up equity share
- Investor may wish to be on the board of directors
- Many decisions cannot go ahead without the say so of the angel investor
How To Apply For Seed Funding
The information above is for those who are looking for seed funding for a small project or business. In order to get seed funding for a large projects there are ways in which this can be done.
First is to set up an form your company. Funders need business information to actually lend money to and it looks more professional that this has already been done, if you can build a website to go with it. If you have patents/licensed/agreements this is beneficial and should be submitted to the financiers. Another good idea is if you are a shovel ready leisure resort/ real estate project, have an agreement with a hotel chain, let the funders know!
Nearly all lenders who fund large projects ask project owners to pay towards the fees or some costs of bank instruments to fund your project. There’s only a few circumstances that we have heard of where lenders have given 100% project finance, (read our case study for a real estate project to understand the lender process). One way this can be done is by asking your bank to get a bank loan or some private investors. (We have some Private investors, they are very selective on certain projects.)